Tech

Brocade targeted by M&A rumor mill

Shares jump on IBM speculation, though some see Dell making move

SAN FRANCISCO (MarketWatch) — The tech M&A fever spewed more heat Wednesday as shares of Brocade Communications rose sharply on speculation of a potential buyout deal with IBM Corp.

Brocade
BRCD, -0.04%
shares were up 61 cents, or 10.8%, to close at $6.26 on rumors, including a couple reported in Barron’s, that Big Blue
IBM, +0.33%
was considering acquiring the networking gear maker that has long been considered to be a potential target.

Some analysts reached by MarketWatch downplayed a possible IBM-Brocade marriage, but noted that it definitely is buying season for major tech players hoping to boost their product portfolios at a time when the lines in the data center market are blurring.

Wedbush analyst Kaushik Roy said Brocade is surely an attractive acquisition target, but sees Dell Inc.
DELL
as the more motivated buyer.

“It makes a lot more sense for Dell to buy Brocade than IBM,” he said in an interview. “With Dell, it’s a no-brainer. If Dell has half of a brain, they should be taking Brocade out right now.”

That’s because, of the big tech players vying for a piece of lucrative corporate space, Dell still has a relatively weak product portfolio, especially in networking and data storage.

Gleacher & Co.’s Brian Marshall echoed this view, saying Brocade “is clearly a target asset,” adding, “I would be surprised if nothing happens over the next six months, potentially sooner.”

Meanwhile, he added, Dell is “strategically and secularly challenged with their current portfolio.”

“Brocade makes sense for them because they would gain more storage assets and a footprint in the ethernet networking market,” he said in an phone interview.

Roy of Wedbush argued that if IBM goes for Brocade, “Dell should bid for it too.”

And it’s partly because Big Blue will likely balk at a heated bidding war, as demonstrated by its decision not to pursue Sun Microsystems after Oracle Corp.
ORCL, +0.16%
made it move.

H-P unlikely to step in

In other words, IBM is unlikely to do what Hewlett-Packard
HPQ, -1.86%
did when it outbid Dell for 3Par, and ended up paying $2.35 billion, or more than three times the market value of the small data-storage player.

“H-P was reckless,” Roy argued. “But IBM is not going to be reckless. If Dell goes after [Brocade], I think Dell has a shot.”

RIM to enter growing tablet market

(8:10)

BlackBerry maker RIM could unveil a new tablet computer as early as next week. The introduction of a tablet and new operating system comes at a critical time for RIM, whose phones are facing increasingly tough competition from the iPhone.

H-P itself was rumored to be eyeing Brocade last year, but ended up buying 3Com. The company has been the most acquisitive of the big tech players recently, even as it looks for a new CEO and recovers from the scandal over ex-chief Mark Hurd’s sudden departure.

Shortly after closing the 3Par deal, the Palo Alto, Calif.-based company said it was paying $1.5 billion to buy security software company ArcSight.

IBM itself just inked a deal to buy Netezza Corp. for $1.7 billion.

RBC Capital’s Amit Daryanani also didn’t think IBM would move on Brocade, citing the company’s emphasis on software and services.

“Acquiring an asset like Brocade would be against that philosophy,” he said in an interview.

He also was not sure Dell would want to go for a company with heavy exposure in networking, given H-P’s bid to expand in that space.

“Given that H-P has made a very aggressive move in the networking market, the expectation is that gross margins in networking would trend down,” he said in a phone interview. And such a trend, he added, “would make acquisitions in that space less attractive.”

Instead, Daryanani said Dell will probably focus more on data storage and services.

Oracle another player?

The Redwood City, Calif.-based company has aggressively moved beyond its core database software business, expanding into business applications and even hardware with its purchase of Sun.

“Public enemy No. 1 for Oracle is IBM,” Marshall said, adding gobbling up Brocade could make sense, he added, “if Oracle wanted to mess with IBM.”

One tech behemoth that has recently stayed on the sidelines in the buying spree is Cisco Systems.
CSCO, +0.07%

“Cisco has been silent a little bit,” Roy of Wedbush said. “But they could get active. This is a good time. Cisco cannot buy Brocade because of antitrust issues. But they’re not shy. They’ll strike if and when they see an opportunity.”

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